SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) Q1 2024 Earnings Call Transcript

SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) Q1 2024 Earnings Call Transcript April 25, 2024

SS&C Technologies Holdings, Inc. beats earnings expectations. Reported EPS is $1.28, expectations were $1.22. SSNC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the SS&C Technologies First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I would now like to turn the conference over to Justine Stone, Head of Investor Relations. Justine, you may begin your conference.

Justine Stone: Welcome. And thank you for joining us for our first quarter 2024 earnings call. I’m Justine Stone, Investor Relations for SS&C Technologies. With me today is Bill Stone, Chairman and Chief Executive Officer; Rahul Kanwar, President and Chief Operating Officer; and Brian Schell, our Chief Financial Officer. Before we get started, we need to review the Safe Harbor statement. Please note that various remarks we make today about future expectations, plans and prospects, including the financial outlook we provide, constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent annual report on Form 10-K, which is on file with the SEC and can also be accessed on our website.

These forward-looking statements represent our expectations only as of today, April 25, 2024. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. During today’s call, we will be referring to certain non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to comparable GAAP financial measures is included in today’s earnings release, which is located in the Investor Relations section of our website at www.ssctech.com. I will now turn the call over to Bill.

William Stone: Thanks, Justine. And thanks, everyone. Our first quarter results saw record adjusted revenue of $1,435.8 million, up 5.3%, and our adjusted diluted earnings per share were $1.28, 12.3% increase. Adjusted consolidated EBITDA was $556.8 million for the quarter, a record high for a Q1, and our EBITDA margin came in at 38.8%. Our first quarter adjusted organic revenue growth was 4.7%. The first quarter revenue acceleration was driven by strength in our alternatives, retirement intralinks, and ALPS Advisor businesses. Our recurring revenue growth rate for Financial Services was 6.5%, which includes all software-enabled services and maintenance revenue. For the three months ended March 31, 2024, cash from operating revenue was $180.5 million.

We paid down $79.9 million in debt in Q1 2024, bringing our net leverage ratio to 2.95 times and our net secured leverage ratio to 2.02 times. We bought back 800,000 shares for $52.9 million at an average price of $63.24. The internal deployment of Blue Prism digital workforce across SS&C continues to go well. The 150 basis point year-over-year increase in our EBITDA margin can be attributable in large part to this initiative. A recent Forrester study found an average SS&C Blue Prism client saw a return on investment figure of 330% over three years. The key benefits include business growth, improved productivity, compliance cost avoidance, and improved employee experience and retention. As one of the largest users of Blue Prism technology, we are experiencing these results firsthand.

Earlier this month, we held our first Deliver Europe conference, which was held at the Fairmont in Windsor in the UK, hosting over 250 clients. The enthusiasm and energy over the two-day event was evident, and we’ve received universal positive feedback. I’ll now turn the call over to Rahul to discuss the quarter in more detail.

Rahul Kanwar : Thanks, Bill. Our business had a strong quarter with notable strength in intralinks, retirement, and wealth and investment technologies. We saw improvement in software purchasing and long-term renewal decisions in Q1, which positively impacts our software businesses. This past quarter, we combined our Institutional & Investment Management, or I&IM, business with wealth and investment technologies led by Karen Geiger and Steve Leivent. This change allows us to align several of our software products and services geared toward banks, insurance companies, and wealth and asset managers. Our objectives are to enable accelerated innovation, take advantage of scale to deliver enterprise solutions, and benefit from a consistent sales and marketing process.

We also combined our retirement business with global investor and distribution solutions in order to deliver a seamless customer experience to our shared clients, and once again, take advantage of greater scale and resources. Initial feedback from our customers on these changes has been very positive. We continue to progress on optimizing our cost base and strengthening our offering through use of Blue Prism and other AI and automation technologies. In our fund services business, notable capabilities include intelligent automation that processes over 2 million loan notices each year, enabling customer interaction and support requests through our internally developed large language models and a variety of other advanced protocols. I will now turn it over to Brian to run through the financials.

Brian Schell : Thanks, Rahul. And good day, everyone. As noted in our press release, our Q1 2024 GAAP results reflect revenues of $1.35 billion, net income of $158 million, and diluted earnings per share of $0.62. And as Bill noted earlier in the call, our adjusted revenues were a quarterly record $1.436 billion, up 5.3%, and adjusted diluted EPS was $1.28, up 12.3% versus Q1 2023. Adjusted diluted EPS includes $0.03 in dividend income received on investments previously excluded from adjusted earnings. Going forward, reported adjusted diluted EPS and guidance will include dividend income. The adjusted revenue quarterly increase of $72 million was primarily driven by incremental revenue contributions from alternatives and intralinks.

Acquisitions contributed $3 million and foreign exchange had a favorable impact of $6 million. As a result, adjusted organic revenue growth on a constant currency basis was 4.7%. Our core expenses increased 1.9% or $16 million, excluding acquisitions and on a constant currency basis. Adjusted consolidated EBITDA attributable to SS&C, defined in note three in the earnings release, was $557 million or 38.8% of adjusted revenue, an increase of $48 million or 9.4% from Q1 2023. The 38.8% EBITDA margin reflects a year-over-year improvement of 150 basis points. The 150 basis point margin expansion reflects the positive impact of both revenue growth and disciplined expense management. Net interest expense for the first quarter of 2024 was $116 million, an increase of $4 million from Q1 2023.

The average interest rate in the quarter for the amended credit facility, including the senior notes, was 6.86% compared to 6.21% in the first quarter of 2023. Adjusted net income, as defined in note four in the earnings release, was $324 million, and the adjusted diluted EPS was $1.28. The effective tax rate used for adjusted net income was 26%. Despite the quarterly share purchase activity, a higher average stock price drove the diluted share count up to 253.3 million from 252.1 million for Q4 2023. SS&C ended the first quarter with $413 million in cash and cash equivalents and $6.7 billion in gross debt. SS&C’s net debt as defined in our credit agreement, which excludes cash and cash equivalents of $95 million held at DomaniRx, was $6.4 billion as of March 31st.

Our last 12-month consolidated EBITDA used for covenant compliance was $2.156 billion as of March 2024. Based on net debt of approximately $6.4 billion, our total leverage ratio was 2.95 times, down from 3.05 times at year end. Our secured leverage ratio was 2.02 times as of March 31st. $3.5 billion of our term loan B matures in April 2025, and we are currently evaluating our debt financing options, looking to go to market in the near future. As we look forward to the second quarter and the remainder of the year with respect to guidance, note that we will remain focused on client service and assume that retention rates will be in the range of our most recent results. We will continue to manage our expenses with a cost-discipline approach by controlling and aligning variable expenses to ensure efficiency, increasing productivity to improve our operating margins to leverage our scale, and effectively investing in the business through marketing, sales, and R&D to take advantage of the future growth opportunities ahead of us.

Specifically, we have assumed foreign currency exchange will be at current levels, interest rates remain at current levels with the potential of a couple of short-term rate declines in late 2024. Our refinancing will not materially impact our interest rate expense, but is obviously subject to varying market conditions. GAAP tax rate of approximately 26% on an adjusted basis, which is unchanged from prior guidance. Capital expenditures to remain at the 4.3% to 4.7% of revenues, which is unchanged from prior guidance, and a similar historical weighting share repurchases and net reduction. For the second quarter of 2024, we expect revenue to be in the range of $1.412 billion to $1.452 billion, adjusted net income in the range of $295 million to $311 million, interest expense excluding amortization of deferred financing costs and original issue discounts in the range of $112 to $114 million, diluted shares in the range of 253 million to 254 million, and adjusted diluted of EPS in the range of $1.16 to $1.22.

For the full year 2024, we are raising revenue guidance by $7 million and we expect revenue to be in the range of $5.695 billion to $5.855 billion; adjusted net income in the range of $1.242 billion to $1.322 billion dollars; diluted shares in the range of 252 million to 255 million; adjusted diluted EPS in the range of $4.93 to $5.17; and cash from operating activities to be in the range of $1.302 to $1.382 billion. Our updated 2024 guidance reflects our strong results in the first quarter with a continued positive outlook for the remainder of the year. It also reflects our cost discipline approach and expected margin expansion over the course of the year. Now, I’d like to turn it back over to Bill for final comments.

William Stone: Thanks, Brian. I’d like to take this opportunity to thank a long-term director, Mike Daniels, for his dedication and support. Mike has been on our board for over 10 years and will not stand for re-election. He’s been an important advisor during this time, seeing SS&C grow from $700 million in revenue to over $5.5 billion. We wish him well in his future endeavors. We’ve had a strong start to 2024. And we’re working hard to maintain this momentum. I’d like now to open it up to questions.

Operator: [Operator Instructions]. Your first question comes from the line of Dan Perlin from RBC Capital Markets.

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Q&A Session

Daniel Perlin: Just a quick question on the organic growth trends. They look like they continue to improve here, and I’m just wondering if you can maybe help parse this out, given the current environment we’re in and maybe some of these incremental kind of go-to-market strategy changes or maybe fine tuning points. So how much of the kind of improvement and maybe expected improvement going forward is in kind of just overall demand picking up, Bill, versus kind of sales execution or product realignment and maybe some of this go-to-market motion that’s changing for some of these other business segments.

William Stone: I think, Dan, we have had an awful lot of development work done in our businesses, and we’ve created a number of new solutions for our different clients, and that’s getting traction, particularly our trust product, omni trust [ph], that we’ve married to our Black Diamond, so now wealth advisors can also handle trust, which is important as their clients start to move money to their children and others, and I think that’s been a big opportunity for us. And we’ve also done a number of other things where our delivery to our clients has been improved and our execution on the implementations has also improved, and so I think a combination of those things, some more discipline on the pricing, and we’re still winning. We’re still winning big deals. And as they go live, I think our financial picture will look brighter as we go through the year.

Daniel Perlin: Just a quick follow up. The $0.03 in the quarter that’s related to the dividend income, just I guess a couple of things. One is, was that originally contemplated in kind of the original guidance you gave for 2024? And the $0.03 cents, obviously, going forward, these are going to be adjusted. If it wasn’t, what’s included now? And maybe can you just walk me through what the mechanics of that are? I might have just missed it.

Brian Schell: The $0.03 was not part of the original guidance. As we looked through the appropriate components of adjusted earnings, we felt like these investments were appropriate to be included. If you look at it for presentation purposes, you’ll see we actually included it in last year’s EPS numbers as well. So you can see it on an apples-to-apples basis. So on a go-forward basis, it’s there. We think it’s appropriate. And try to bring any visibility or clarity we can to the numbers.

Daniel Perlin: So should we be using $0.03 a quarter as part of the run rate?

Brian Schell: No.

Daniel Perlin: I think the year-over-year comparison was adjusted. But I just want to make sure I’m not getting over my skis or over-adjusting or under-adjusting.

Brian Schell: The big, I think, contribution to the year is actually just the first quarter. I would say for the remainder of year, it probably rounds to probably another $0.01 overall from the next three quarters. So it’s not a huge adjustment, but we just thought it was relevant given how we reflected the rest of our investments and various interest income items to be included in our overall adjusted results.

Daniel Perlin: And just to be clear, it’s $0.01 for the remaining three quarters, not a $0.01 per quarter?

Brian Schell: Correct.

Operator: Your next question comes from the line of Andrew Schmidt from Citi.

Andrew Schmidt: Quick question on the revenue outlook. It looks like the upper end came down. I’m just curious what drove that and how that might tie into the organic growth expectations for the remainder of the year.

Rahul Kanwar: Andrew, I think the only thing that happened – we’re actually at least as optimistic about the remainder of the year as we were at the start. I think the only thing that happens is, as we get closer, the ranges get tighter, we get a little more precise. So that’s really all that’s happening. I think the midpoint is actually higher than it was the last time we gave guidance.

Andrew Schmidt: Maybe we could talk about just the visibility of the organic growth. Obviously, [indiscernible] where we get a lot of questions. If you could characterize kind of how you build that up and whether what you have sort of in the queue, if you will, for organic growth is sort of high versus moderate versus low, how you would rank the opportunities there.

William Stone: I would say right now, as of April 25th, that we’re probably stronger than cautiously optimistic. We tend to be accountants. Cautiously optimistic is, for most people, wildly optimistic for us. So I think the natural conservatism sometimes gets the best of us. But we have a lot of business that we sold in the first quarter that we have not recognized yet. But it’s already sold. We’ve already got some of the cash. It’s coming in. And we think we’ve got lots of opportunities.

Operator: Your next question comes from Alexei Gogolev from J.P. Morgan.

Alexei Gogolev: Bill, could you elaborate on the combination of divisions that was discussed? What does that mean in terms of cross-sell opportunity, R&D investments into products to make sure that they speak better to each other? And perhaps is there any room for margin upside from the combination of those divisions?

William Stone: We’re 27,000 people. We have 140 offices in 40 countries. We deliver over 100 products and 100 services. So it is operating a large business. And the more we can concentrate like products in the business units that are most apt to create new product, create new service, create ways in which to deliver those products and services, and then also be able to leverage all the corporate services that we have, whether it’s marketing and sales, different implementation teams, all that type of stuff we think is really much more effective when you take asset management and products for large-scale asset managers and put all those products under Karen Geiger and Steve Leivent, for instance, and then also then have go-to-market strategies for each one of those large segments.

And I think the same thing is true when we took retirement and put it in with the global distribution or the global investor and distribution business. I think we get leverage. We get – as Rahul said in his remarks, we get some leverage, we get some scale, we get some better chances to cross-sell. And we’re, again, pretty optimistic about the results.

Alexei Gogolev: Brian, could I also ask you a quick question about the components within alternatives division? What was the growth of private market in the quarter?

Brian Schell: The private market side, 10-percent-ish was the number of private.

Operator: Your next question comes from the line of Peter Heckmann from D.A. Davidson.